Average Home Prices top $500k: Preparing your Association for a Market Correction

A recent news story reported that average home prices in the metro Denver area now exceed $500,000. While that may seem like good news for homeowners, it likely signals that a correction is coming in the near future. If history is any indicator, rising home prices and interest rates eventually catch up to create a crash in the housing market.  Unfortunately, I don’t hold a crystal ball to see when or if the crash will happen, however, here are some ways that community associations can start preparing themselves financially:

• Reserves: Consider increasing the amount that is contributed to the association’s reserve account on an annual basis. This is much easier to accomplish while the economy is great than while unemployment is high. In the event that reserve funds are needed for a capital expenditure in the future, the funds will be readily available and avoid the headache of passing a special assessment or borrowing funds to finance the repair.                                                                                                                                                                                                                                                           
• Bad Debt Fund: I suggest considering a small annual contribution to a ‘bad debt fund’. While most annual budgets account for bad debt, those projections are normally based on the current state of association receivables by looking back at the prior fiscal year. Consider placing a small amount annually into a separate ‘bad debt’ account. In the future, if the economy tanks and delinquencies rise, the association will have a cushion to ensure that there are sufficient operating funds.                                                                                                                                                             
• Diligent Collection of Delinquent Accounts: Consider strictly complying with the association’s collection policy regarding delinquent debt.  An association does not want to find itself collecting delinquent debt that came due ‘during the good times’ if the economy subsequently tanks and the amount of delinquencies rise.